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Notes Payable-Related Parties

9 Months Ended

Nov. 30, 2022

Notes Payable Related Parties [Abstract]

NOTE 9 – NOTES PAYABLE-RELATED PARTIES

Notes payable-related parties consisted of the following:

	November 30, 2022		February 28, 2022
Unsecured notes payable
(a) Notes payable-Koppel (prior to restructuring)	$	-	$	5,607,323
Accrued interest-Koppel (prior to restructuring)		-		6,533,318
Note payable-Kopple (restructured)		10,939,169		-
Subtotal-Koppel		10,939,169		12,140,641

(b) Note payable- Gagerman		82,000		82,000
Accrued interest-Gagerman		79,605		73,428
Subtotal-Gagerman		161,605		155,428

(c) Note payable-Jiangsu Shengfeng		700,000		700,000

Total	$	11,800,774	$	12,996,069
Non-current		8,089,169		-
Current	$	3,711,605	$	12,996,069

(a) Kopple Notes

In fiscals 2013 through 2018, the Company issued notes payable to Robert Kopple and associated entities (collectively “Kopple”) in the aggregate of $6,107,323. Robert Kopple is the former Vice-Chairman of the Company’s Board of Directors and is a current shareholder in the Company. The notes were unsecured, bear interest at rates ranging from 5% and 15% per annum and were due in fiscal 2014 through fiscal 2018. Kopple brought suit against the Company beginning in 2017 for repayment of the notes.

At February 28, 2022, the accrued interest due to Kopple totaled $6,533,318. Due to its significance, the balance of accrued interest is added to the note payable principal for presentation on the accompanying balance sheet as of February 28, 2022. As of February 28, 2022, the outstanding balance of the Kopple notes payable and accrued interest amounted to $12,140,641.

On March 14, 2022, the Company reached an agreement with Kopple to resolve all remaining litigation between them, including all amounts owed to Kopple under the notes. Under the terms of the settlement, the Company agreed to issue a new note and pay Kopple an aggregate amount of $10,000,000, including $3,000,000 to be paid in June 2022, which was subsequently extended to January 2023 (see Note 16), and granted Koppel warrants exercisable into 3,331,664 shares of the Company’s common stock at a price of $0.85 per share. The Company used Black-Scholes modeling to compute the fair value of the warrants which is estimated to be $1,051,473. The settlement provides for certain increases in the amount payable to Kopple and the right of such parties to enter judgment against the Company if the Company remains in uncured default in its payment obligations. Interest on the settled Note begins accruing in February 2023. Pursuant to the settlement agreement, the Company is also subject to certain affirmative and negative covenants such as periodic submission of financial statements to Koppel and restrictions on future financing and investing activities, as defined in the agreement. Management believes such covenants are normal for this type of transaction and that management believes meeting these covenants will not affect operations.

The Company assessed the settlement with Kopple under ASC 470 and determined that the guidance under troubled debt restructuring should apply. Per ASC 470-60, the carrying value of the restructured note remains the same as before the restructuring, reduced only by the fair value of the warrants issued in connection with the transaction. The Company determined that the future undiscounted cash flows of the restructured new Kopple note exceeded the carrying value, and accordingly, no gain was recognized, and no adjustment was made to the carrying value of the debt, other than the adjustment for the fair value of the warrants. Interest expense on the new Kopple note will be computed using a new effective rate that equates the present value of the future cash payments specified by the new terms with the carrying value of the debt.

(b) Note payable-Gagerman

Melvin Gagerman, the Company’s former CEO and CFO whose employment was permanently terminated in July 2019, claims that in April 2014 the Company issued an unsecured demand promissory note to him in the amount of $82,000 that bears interest at a rate of 10% per annum. Gagerman claims that this note has not been repaid to-date and is now owed.

In June 2022, Gagerman brought suit against the Company for repayment of this alleged note. Despite the fact that, based on Gagerman’s allegations, the note was issued during a period when Gagerman was the Company’s CEO, CFO, Corporate Secretary and Chairman of the Company’s Board of Directors, Gagerman has stated that he does not possess a copy of the alleged promissory note. The Company disputes that any amount is presently owed to Gagerman. Additionally, the Company has filed a cross-complaint against Gagerman for, among things, conversion, violation of California Business & Professions Code §17200, and various breaches of fiduciary duty that the Company believes Gagerman committed against the Company (see Note 15).

Based on Gagerman’s claims, as of November 30, 2022 and February 28, 2022, the outstanding balance of the Gagerman notes payable and accrued interest would amount to $161,605 and $155,428, respectively. As of November 30, 2022 and February 28, 2022, despite the fact that the Company disputes Gagerman’s claims, under ASC 450 - Contingencies, the Company has recorded the claimed notes payable and accrued interest amounts of $161,605 and $155,428, respectively, in the accompanying balance sheets.

On November 20, 2019, the Company reached an agreement with its joint venture partner Jiangsu Shengfeng regarding the return of $700,000 that had been advanced to the Company, and the Company issued a non-interest-bearing promissory note for $700,000 to be paid over a 11-month period beginning March 15, 2020, through February 15, 2021. As of November 30, 2022 and February 28, 2022, the principal due was $700,000.